What $1,600 Gold Really Means for You

Gold barsMost people don't pay too much attention to gold prices. But the higher they climb, the tougher they are to ignore: Higher prices mean more annoying TV commercials that try to make gold investment sound like a one-way trip to paradise, and more mall kiosks offering to relieve shoppers of their "junk" gold.

As gold surges past yet another milestone -- more than $1,600 per ounce, with silver reclaiming $40 -- it's tempting to rummage through your jewelry box and raise a bit of cash. Hold your horses.

There are other, better ways of making money off rising prices (I'll show you how in a moment). But first you should know why gold is spiking and how the other news of the day might affect future prices.

Gold as an Insurance Policy

You may commonly hear gold referred to as a "fear trade," or an "insurance policy" against worst-case scenarios for our financial system. But such overly simplistic labels fail miserably at explaining the metal's persistent, almost orderly appreciation over the past decade.

During 2008 when fear was rampant -- far more observable than it is today -- gold should have surged, right? The exact opposite happened, and gold tumbled violently. In fact, the SPDR Gold Trust (GLD) suffered its worst annual performance since inception. So much for insurance.

Gold as Money

Gold to GoEven though President Richard Nixon removed the U.S. dollar's international convertibility to gold in 1971, gold remains a currency. Despite our modern financial system's attempt to leave gold behind, even former Federal Reserve Chairman Alan Greenspan in 2009 conceded that "gold still holds reign over the financial system as the ultimate source of payment."

Most nations on the planet still hold stacks of gold bullion within their foreign currency reserves. But gold isn't just any currency. It's unique in that it remains utterly impervious to the burdens of debt, default risk, and other ailments that are weighing so heavily upon many of the world's major unbacked paper currencies.

Compared to the value-eroding euro and U.S. dollar, gold offers a far superior record of enduring purchasing power over the long haul. Gold's meaningful price gains offer the clearest indication of that outperformance from the perspective of long-term savers.

Basically, gold is a currency that competes with (and trades against) the full array of paper currencies. Yes, gold jumps upward when eurozone debt crises explode, or politicians in Washington, D.C., fail to achieve a timely accord on key deficit reductions. But a currency link exists between those events that are supportive (or unsupportive) for gold, and the resulting changes in price. Gold goes up when the United States flirts with default by pushing the debt-ceiling impasse to the final hour, but that is because those actions cause further damage to the outlook for the U.S. dollar.

What Next? Gold at $2,000? Actually...

Now that gold prices have busted through the $1,600 threshold, the natural question arises: What next?

No one can predict future prices with absolute certainty, but I suspect a final-hour agreement to raise the U.S. debt ceiling may trigger a near-term rally for U.S. Treasury bonds and the U.S. dollar, which could place gold prices under a bit of pressure.

Gold has now nearly doubled in price since I offered 700 billion reasons to own some back in 2008, but that doesn't mean it's too late to get started now. I encourage investors to welcome any such weakness in gold as an opportunity to hop on board for what I believe will be a journey to at least $2,000 per ounce.

How to Get in on the Gold Rush

Although trustworthy bullion vehicles like Central Fund of Canada (CEF) offer one-stop access to gold and silver bullion exposure, I recommend gold mining stocks as the most profitable road forward.

For reasons I explain here, I consider Northgate Minerals (NXG) the greatest gold stock in the world, followed by additional top picks Brigus Gold (BRD) and AuRico Gold (AUQ). Goldcorp (GG) remains the cream of the crop among the largest producers, although Newmont Mining (NEM) entered bargain territory before this latest golden surge.

Motley Fool contributor and bloggerChristopher Barker owns shares of AuRico Gold, Brigus Gold, Central Fund of Canada, Goldcorp, and Northgate Minerals.


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mmcdonald2k

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July 23 2011 at 12:11 AM Report abuse -1 rate up rate down Reply
arthurans34

I BOUGHT ABOUT 40 OUNCES OF GOLD IN2006 AND HAVE DONE WELL WITH IT, BUT I REALIZE THAT IN BAD TIMES ONE CANNOT EAT DIGEST AND CRAP GOLD. LEARN TO HUNT FISH AND GROW A GARDEN. THAT PAPER MONEY IS ONLY PAPER UNDER DIRE CIRCUMSTANCES. READ" ONE SECOND AFTER", SCARY AND POSSIBLEY TRUE

July 20 2011 at 7:02 AM Report abuse -1 rate up rate down Reply
cheese line occupant

gold and seeds will be the only currency in 10yrs., mark my word you read it on here....!!! there will be no oil, there will be no Anything because without Oil the world will starve and half of the world population will die off...(( lookit up if you don't believe me)) but it takes 7 gallons of oil to make one car tire...ONE...anything that's no wood takes OIL to make, at some point of the process, People the world as we know it coming to an end....it wont matter what job you have now, what car you drive now, what social level you are on..How may cell phones and computers you own,or Big screen this and that...Nothing will matter...it's Darwinism at it's most basic level...survival of the fittest and most prepared.....I worked all my life for what I have now...you yuppie spoiled screwballs will have no idea what to do without your manicures and Escalades....the State and Federal Governments will crumble because no one will be getting paid...that means...no police,transportation, air traffic controllers( flying),no infrastructure mtnce., No Fed Reserve= no banks will have money....are you going to go to work if you aren't going to be paid..?...why would all Gov employees FED , State and Local work then...???...think about it...?....billionaires are already at 10% rate losing all they own...how long till we do....?...I am not preaching...I am not a Gloom and Doomer, I am not a conspiracy NUT....I just do alot of watching, listening and thinking....watch your news tonight....any news that Great Brittain are already at social unrest, riots,...it's over Money...!!!!!...Mexico....it's not Drug wars...it's surviving......simple thought..New York Garbage strike was a month....imagine 3-4 months...???...a year..???...it's local Government...Sanitation Dept....!!!!!!!!!.....people look it up on line for yourself...there are already camps set up all over the US...for People Like you and Me...fenced off camps....ready to operate.....tent cities are already beginning to rise....Ok Im done....call me a NUT...call me Crazy....but remember whee you read it...nighty night

July 20 2011 at 3:13 AM Report abuse -2 rate up rate down Reply
1 reply to cheese line occupant's comment
Steven

Your wrong about one thing if all this happens like you say. There will be plenty of police and military to protect whatever rich and wealthy that are left. At least for a while until they run out of money. The United States could have been in much better shape than they are now if they wouldn't have exported most of the good paying jobs out of country. Many people say that we could not be a protectionist style of country. We need all this world trade. Ok ,how about doing it on our terms then. We let all this happen. Can we change it? Not likely now I'm afraid. The big money powers are running our country. Energy, Insurance, and the banks.

July 20 2011 at 7:54 AM Report abuse +2 rate up rate down Reply
don_hasting

Try telling Bernanke that gold is money. His weak response answer of "it's Tradition" to Ron Paul asking why do the central banks hold physical gold if it is not money was comical. When our fiat currency collapses like all others before it, holders of physical pm's will be part of the greatest wealth transfer the earth has ever seen. Buy physical only, if you can't touch it, you don't own it!

July 19 2011 at 11:10 PM Report abuse -1 rate up rate down Reply
fakeconomics1

JUST SAVE YOUR MONEY!! DO NOT SPEND!!!

July 19 2011 at 10:40 PM Report abuse -1 rate up rate down Reply
fakeconomics1

Who is siding with GLOBAL TRADE? NAFTA? and Most Favored Nation Status to Communist Countries? Just STOP!! Reject Communists!!

July 19 2011 at 10:39 PM Report abuse +2 rate up rate down Reply
fakeconomics1

Las Vegas has more logic and rationale---than Wall Street!!

July 19 2011 at 10:37 PM Report abuse +3 rate up rate down Reply
fakeconomics1

Humpty---Dumpty----GOLD and--OIL----have seen its BEST-----They are going Down!!

July 19 2011 at 10:35 PM Report abuse +2 rate up rate down Reply
fakeconomics1

Speculators are going down----Oil---GOLD----BANKS-----Healthcare Industry are GOING DOWN!!!

July 19 2011 at 10:34 PM Report abuse rate up rate down Reply
fakeconomics1

HYPE is STUPID-----GOLD is STUPID------It will fall to its own feet!!

July 19 2011 at 10:33 PM Report abuse +1 rate up rate down Reply